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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 24, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-14709
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HUTCHINSON TECHNOLOGY INCORPORATED
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0901840
- --------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 WEST HIGHLAND PARK, HUTCHINSON, MINNESOTA 55350
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(Address of principal executive offices) (Zip code)
(320) 587-3797
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(Registrant's telephone number, including area code)
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(Former name, address or fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of January 31, 2001 the registrant had 24,871,368 shares of Common Stock
issued and outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in thousands)
December 24, September 24,
2000 2000
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 146,826 $ 129,314
Securities available for sale 96,661 110,955
Trade receivables, net 63,164 60,637
Other receivables 3,641 4,071
Inventories 29,398 32,516
Prepaid taxes and other expenses 17,855 16,967
--------- ---------
Total current assets 357,545 354,460
Property, plant and equipment, net 270,965 283,659
Other assets 43,048 45,814
--------- ---------
$ 671,558 $ 683,933
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of capital lease obligation $ 8,855 $ 8,538
Current maturities of long-term debt 19,277 20,910
Accounts payable and accrued expenses 32,942 38,674
Accrued compensation 17,147 15,729
--------- ---------
Total current liabilities 78,221 83,851
Capital lease obligation 7,857 9,718
Long-term debt, less current maturities 39,334 44,706
Convertible subordinated notes 150,000 150,000
Other long-term liabilities 2,699 3,169
Shareholders' investment:
Common stock, $.01 par value, 45,000,000 shares authorized,
24,850,000 and 24,830,000 issued and outstanding 249 248
Additional paid-in capital 364,782 364,540
Retained earnings 28,416 27,701
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Total shareholders' investment 393,447 392,489
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$ 671,558 $ 683,933
========= =========
See accompanying notes to condensed consolidated financial statements.
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HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
Thirteen Weeks Ended
-------------------------------
December 24, December 26,
2000 1999
------------ ------------
Net sales $ 118,914 $ 123,823
Cost of sales 99,020 115,840
---------- ----------
Gross profit 19,894 7,983
Selling, general and
administrative expenses 12,752 11,309
Research and development
expenses 6,508 5,541
Asset impairment and other (Note 3) -- 46,528
---------- ----------
Income (loss) from operations 634 (55,395)
Interest expense (3,973) (2,999)
Other income, net 4,133 3,227
---------- ----------
Income (loss) before income taxes 794 (55,167)
Provision (benefit) for income taxes 79 (15,998)
---------- ----------
Net income (loss) $ 715 $ (39,169)
========== ==========
Basic earnings (loss) per share $ 0.03 $ (1.58)
Diluted earnings (loss) per share $ 0.03 $ (1.58)
Weighted average common shares outstanding 24,849 24,745
Weighted average common and diluted shares outstanding 25,162 24,745
See accompanying notes to condensed consolidated financial statements.
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HUTCHINSON TECHNOLOGY INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
Thirteen Weeks Ended
---------------------------------
December 24, December 26,
2000 1999
------------ --------------
Operating activities:
Net income (loss) $ 715 $ (39,169)
Adjustments to reconcile net income (loss) to
cash provided by (used for) operating activities:
Asset impairment and other -- 46,528
Depreciation and amortization 22,429 24,056
Deferred taxes 965 (19,163)
Change in operating assets and liabilities (Note 8) (2,887) 19,981
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Cash provided by operating activities 21,222 32,233
--------- ----------
Investing activities:
Sales of marketable securities 39,688 11,461
Purchases of marketable securities (25,394) (31,880)
Capital expenditures (9,698) (26,059)
--------- ----------
Cash provided by (used for) investing activities 4,596 (46,478)
--------- ----------
Financing activities:
Repayments of long-term debt (7,005) --
Repayments of capital lease obligation (1,544) (21)
Net proceeds from issuance of common stock 243 30
--------- ----------
Cash provided by (used for) financing activities (8,306) 9
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Net increase (decrease) in cash and cash equivalents 17,512 (14,236)
Cash and cash equivalents at beginning of period 129,314 98,820
--------- ----------
Cash and cash equivalents at end of period $ 146,826 $ 84,584
========= ==========
See accompanying notes to condensed consolidated financial statements.
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HUTCHINSON TECHNOLOGY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(Dollars in thousands)
Unless otherwise indicated, references to "2001" means HTI's fiscal year ending
September 30, 2001 and references to "2000" mean HTI's fiscal year ended
September 24, 2000.
(1) ACCOUNTING POLICIES
The condensed consolidated financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished in the condensed consolidated
financial statements includes normal recurring adjustments and reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of such financial statements. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest Annual Report on Form 10-K.
The quarterly results are not necessarily indicative of the actual results that
may occur for the entire fiscal year.
(2) ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as
amended by Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133" ("SFAS 138"), effective September 25, 2000. SFAS 133
requires a company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the hedged assets, liabilities or firm commitments
are recognized through earnings or in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The Company has
determined that the effect of adopting SFAS 133 and SFAS 138 was not material to
the earnings and the financial position of the Company.
(3) ASSET IMPAIRMENT AND OTHER
The Company recorded charges in its first quarter of 2000 of $43,528,000 for
impaired assets and $3,000,000 for severance costs. These charges are reflected
on the accompanying statement of operations as "Asset impairment and other."
Advances in technology have enabled disk drive manufacturers to reduce their
costs by using fewer components, including suspension assemblies, in each disk
drive. Industry forecasts during quarter one of 2000 indicating further
decreases in component counts, extending from the desktop market to server
drives, triggered an impairment review by the Company late in that quarter. As a
result, the Company prepared an analysis, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", to determine if
there was impairment of certain excess manufacturing equipment and tooling,
primarily for TSA suspensions. The analysis resulted in an impairment charge
based on the difference between the
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carrying value and the estimated fair value of these assets. Fair value was
based on discounting estimated future cash flows for assets grouped at the
lowest level for which there were identifiable cash flows at a discount rate
commensurate with the risks involved.
During quarter one of 2000, the Company terminated approximately 250 employees
in its workforce, including indirect positions in its administrative,
development and manufacturing support areas at all plant sites. The workforce
reduction resulted in a charge for severance costs of $3,000,000. The full
amount of these severance costs has been paid.
(4) BUSINESS AND CUSTOMERS
The Company is the world's leading supplier of suspension assemblies for hard
disk drives. Suspension assemblies hold the recording heads in position above
the spinning magnetic disks in the drive and are critical to maintaining the
necessary microscopic clearance between the head and disk. The Company developed
its leadership position in suspension assemblies through research, development
and design activities coupled with a substantial investment in manufacturing
technologies and equipment. The Company is focused on continuing to develop
suspension assemblies which address the rapidly changing requirements of the
hard disk drive industry. The Company also is evaluating other product
opportunities in the medical device and other markets, but does not expect to
generate significant revenue. A breakdown of customer sales is as follows:
Thirteen Weeks Ended
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December 24, December 26,
Percentage of Net Sales 2000 1999
- ----------------------- ------------ ------------
Five Largest Customers 93% 87%
SAE Magnetics, Ltd/TDK 27 26
Read-Rite Corporation 25 10
Seagate Technology, Inc. 15 21
Alps Electric Co., Ltd. 13 15
IBM and affiliates 13 15
(5) INVENTORIES
At December 24, 2000, all inventories were stated at the lower of first-in,
first-out ("FIFO") cost or market. Inventories consist of the following:
December 24, September 24,
2000 2000
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Raw materials $ 7,750 $ 9,129
Work in process 8,329 9,680
Finished goods 13,319 13,707
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$ 29,398 $ 32,516
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(6) NET INCOME PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted earnings (loss) per share is computed under
the treasury stock method and is calculated to compute the dilutive effect of
potential common shares. A reconciliation of these amounts is as follows:
Thirteen Weeks Ended
--------------------------------
December 24, December 26,
2000 1999
------------ ------------
Net income (loss) available for common $ 715 $(39,169)
shareholders ------- --------
Weighted average common shares outstanding 24,849 24,745
Dilutive potential common shares 313 --
------- --------
Weighted average common and diluted shares 25,162 24,745
outstanding ======= ========
Basic earnings (loss) per share $ 0.03 $ (1.58)
Diluted earnings (loss) per share $ 0.03 $ (1.58)
Potential common shares of 5,291,000 related to the Company's outstanding
convertible subordinated notes were excluded from the computation of diluted
earnings (loss) per share for the thirteen weeks ended December 24, 2000 and
December 26, 1999, as inclusion of these shares would have been antidilutive.
Potential common shares of 418,000 related to the Company's outstanding stock
options were excluded from the computation of diluted loss per share for the
thirteen weeks ended December 26, 1999, as inclusion of these shares would have
been antidilutive.
(7) INCOME TAXES
The following table details the significant components of the Company's deferred
tax assets:
December 24, September 24,
2000 2000
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Current deferred tax assets:
Receivable reserves $ 2,560 $ 2,271
Inventories 9,294 9,290
Accruals and other reserves 4,691 4,571
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Total current deferred tax assets $ 16,545 $ 16,132
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Long-term deferred tax assets:
Property, plant and equipment 13,603 15,162
Tax credits 13,405 13,043
Net operating loss carryforwards 50,687 50,687
Valuation allowance (45,598) (45,417)
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Total long-term deferred tax assets 32,097 33,475
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Total deferred tax assets $ 48,642 $ 49,607
========= =========
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Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 24, 2000, the
Company had unused tax credits and net operating loss carryforwards of
$64,092,000, of which $5,525,000 can be carried forward indefinitely and
$58,567,000 expire at various dates through 2020. A valuation allowance of
$45,598,000 has been recognized to offset the related deferred tax assets due to
the uncertainty of realizing the benefit of certain tax credits and net
operating loss carryforwards.
(8) SUPPLEMENTARY CASH FLOW INFORMATION
Thirteen Weeks Ended
--------------------------
December 24, December 26,
2000 1999
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Changes in operating assets and liabilities:
Receivables, net $ (2,097) $ 18,345
Inventories 3,118 (1,133)
Prepaid and other 701 175
Accounts payable and accrued liabilities (4,139) 3,477
Other non-current liabilities (470) (883)
--------- --------
$ (2,887) $ 19,981
========= ========
Cash paid for:
Interest (net of amount capitalized) $ 1,791 $ 131
Income taxes 502 1,050
Capitalized interest for the thirteen weeks ended December 24, 2000 was $259,000
compared to $980,000 for the comparable period in 2000.
(9) LEGAL CONTINGENCIES
On September 18, 2000, HTI commenced a lawsuit in the United States District
Court for the District of Minnesota against the Magnecomp Group, an
unincorporated association of companies, and seven members of the Magnecomp
Group. The lawsuit alleges that the Magnecomp Group has sold infringing products
without a license, and alleges infringement of nine of HTI's patents related to
the design and manufacture of suspension assemblies. The lawsuit requests
damages, including treble damages, attorneys' fees, costs, and an injunction
against the Magnecomp Group.
On October 12, 2000, Magnecomp Corporation commenced a lawsuit in the United
States District Court for the Central District of California against HTI. The
lawsuit alleges that HTI has sold products infringing four patents, engaged in
anti-competitive conduct in violation of federal and state antitrust laws, and
violated California state law regarding contractual interference and unfair
competition. The lawsuit requests damages, including treble damages, attorneys'
fees, costs, punitive damages, and an injunction against HTI. On December 8,
2000, the California District Court issued an order granting HTI's motion to
transfer the California action to the United States District Court for the
District of Minnesota.
The Company and certain users of the Company's products have from time to time
received, and may in the future receive, communications from third parties
asserting patents against the Company or its customers which may relate to
certain of the Company's manufacturing equipment or products or to products that
include the Company's products as a component. The Company is currently a party
to the litigation described above. In addition, certain of its customers have
been sued on patents having claims
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closely related to products sold by the Company. If any third party makes a
valid infringement claim and a license were not available on terms acceptable to
the Company, the Company's operating results could be adversely affected. The
Company expects that, as the number of patents issued continues to increase, and
as the Company grows, the volume of intellectual property claims could increase.
The Company may need to engage in litigation to enforce patents issued or
licensed to it, protect trade secrets or know-how owned by it or determine the
enforceability, scope and validity of the intellectual property rights of
others. The Company could incur substantial costs in such litigation or other
similar legal actions, which could have a material adverse effect on its results
of operations.
The Company is a party to certain other claims arising in the ordinary course of
business. In the opinion of management, the outcome of such claims will not
materially affect the Company's current or future financial position or results
of operations.
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HUTCHINSON TECHNOLOGY INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Unless otherwise indicated, references to "2001" means HTI's fiscal year ending
September 30, 2001, references to "2000" mean HTI's fiscal year ended September
24, 2000, and references to "1999" mean HTI's fiscal year ended September 26,
1999.
GENERAL
Since the late 1980's, we have derived virtually all of our revenue from the
sale of suspension assemblies to a small number of customers. We currently sell
a variety of suspension assemblies based on several standard designs. Suspension
assemblies are a critical component of hard disk drives and our results of
operations are highly dependent on the hard disk drive industry. The hard disk
drive industry is intensely competitive and volatile and our results of
operations have been adversely affected from time to time due to hard disk drive
industry slowdowns, technological changes that impact industry component demand
and production yields and our own product transitions.
Improvements in data density of hard disk drives, which have outpaced storage
capacity requirements, have enabled disk drive manufacturers to reduce their
costs by using fewer components, including suspensions, in each drive. Improved
head-gimbal assembly yields at our customers and shifts in our share of certain
drive programs have also, to a lesser extent, decreased demand for our products.
Results for 1999 and 2000, therefore, did not show the results we expected, as
unit shipments declined. Unit shipments did show some improvement during the
fourth quarter of 2000 and the first quarter of 2001. But, due to temporary
industry inventory adjustments, our unit shipments for the second quarter of
2001 are likely to decrease from first quarter levels. Given these market
conditions, we continue to have limited visibility for future demand. We will
continue to have excess capacity until average component counts within disk
drives stabilize or increase, or our share of certain drive programs increases,
or until Internet-related storage growth increases or new applications for disk
storage become more widespread.
Our selling prices are subject to pricing pressure from our customers and market
pressure from our competitors. Our selling prices also are affected by changes
in overall demand for our products, changes in the specific products our
customers buy and a product's life cycle. A typical life cycle for our products
begins with higher pricing when a product is introduced, decreasing prices when
it is mature, and slightly increasing pricing as it is phased out. To offset
price decreases during a product's life, we rely primarily on higher sales
volume. We also rely on improving our manufacturing yield to reduce the cost of
manufacturing our mature products. If we cannot reduce our manufacturing costs
during a product's life cycle, or at all, our business, financial condition and
results of operations could be materially adversely affected.
Our gross margins have fluctuated and will continue to fluctuate based upon a
variety of factors such as changes in demand, increases in production and
engineering costs associated with production of new products, product mix,
selling prices, the level of utilization of our production capacity,
manufacturing yields and changes in the cost of materials. Gross margins have
been negatively impacted since the third quarter of 1999 by lower than expected
suspension shipments resulting in excess manufacturing equipment and tooling.
Gross margins did improve, however, during the fourth quarter of 2000 and the
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first quarter of 2001 due to higher unit shipments, cost reduction measures and
manufacturing productivity and yield improvements.
Our ability to introduce new products on a timely basis is an important factor
in our success. New products have lower manufacturing yields and are produced in
lower quantities than more mature products. Our dedicated development center
enables us to shorten development cycles and achieve high volume output per
manufacturing unit more quickly. Manufacturing yields generally improve as the
product matures and production volumes increase. Manufacturing yields also vary
depending on the complexity and uniqueness of product specifications. Because
our business is capital intensive and requires a high level of fixed costs,
gross margins are also extremely sensitive to changes in volume. Small
variations in capacity utilization or manufacturing yields generally have a
significant impact on gross margins.
We typically allow customers to change or cancel orders on short notice without
penalty. We plan our production and inventory based primarily on forecasts of
customer demand, including forecasts of customer pulls of product out of our
"just-in-time" inventory hubs, rather than on order backlog. Both customer
demand and the resulting forecasts often fluctuate substantially. These factors,
among others, create an environment where scheduled production and capacity
utilization can vary significantly from week to week, leading to variability in
gross margins and difficulty in estimating our market share.
In addition to increases in suspension assembly demand, improvements to our
operating margins depend, in part, on the successful management of our corporate
infrastructure, our suspension assembly production capacity and our workforce.
During the past two years, we consolidated some of our manufacturing operations
to make better use of existing equipment and support staff across all of our
plants and to reduce costs. As part of our efforts to improve our operating
margins through reduced costs and improved efficiency, we reduced our overall
employment level by 3,010 employees during the past five fiscal quarters through
workforce reductions and managed attrition.
We currently are reducing our workforce by approximately 300 employees and
expect to implement additional cost reduction efforts in the second quarter of
2001. Employees whose positions are eliminated will be offered a severance
package.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 24, 2000 VS. THIRTEEN WEEKS ENDED DECEMBER 26,
1999.
Net sales for the thirteen weeks ended December 24, 2000 were $118,914,000, a
decrease of $4,909,000 or 4% from the comparable period in 2000. This decrease
was primarily a result of lower suspension assembly sales volume, somewhat
offset by higher average selling prices.
Gross profit for the thirteen weeks ended December 24, 2000 was $19,894,000,
compared to $7,983,000 for the comparable period in 2000. Gross profit as a
percent of net sales increased from 6% to 17%, primarily due to lower
manufacturing labor and benefits expenses as a result of the workforce
reductions and manufacturing productivity and yield improvements that occurred
during 2000, partially offset by the lower sales volume noted above.
Research and development expenses for the thirteen weeks ended December 24, 2000
were $6,508,000 compared to $5,541,000 for the thirteen weeks ended December 26,
1999. The increase was mainly due to increased advanced suspension development
expenses. As a percent of net sales, research and development expenses increased
from 4% in the first quarter of 2000 to 5% in the first quarter of 2001.
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Selling, general and administrative expenses for the thirteen weeks ended
December 24, 2000 were $12,752,000, an increase of $1,443,000 or 13% compared to
the comparable period in 2000. The increase was due mainly to increased
professional services expense of $722,000 and other incentive compensation costs
of $500,000. As a percent of net sales, selling, general and administrative
expenses increased from 9% in the first quarter of 2000 to 11% in the first
quarter of 2001.
During the first quarter of 2000, we recorded a charge of $46,528,000 to write
down certain assets and record severance costs for approximately 250 employees
terminated during the quarter. Components of the charge included a $43,528,000
asset write-down of impaired manufacturing equipment and tooling, primarily for
our TSA suspensions, and $3,000,000 of severance costs. See Note 3, "Asset
Impairment and Other", in the notes to the condensed consolidated financial
statements.
Other income for the thirteen weeks ended December 24, 2000 was $4,133,000, an
increase of $906,000 from the comparable period in 2000, primarily due to an
increase of $380,000 in interest income as a result of higher investment yields
and a $160,000 gain from the sale of assets and supplies.
Interest expense for the thirteen weeks ended December 24, 2000 increased
$974,000 from the comparable period in 2000, primarily due to a decrease in
capitalized interest of $723,000 and interest expense on capitalized leases of
$685,000, offset partially by a decrease in interest expense on our outstanding
debt.
The income tax expense for the thirteen weeks ended December 24, 2000 was based
on an estimated effective tax rate for the fiscal year of 10% which was below
the statutory federal rate primarily due to lower forecasted income and the
interplay between the types of net operating losses we have generated and the
provisions for carrying these benefits forward.
Net income for the thirteen weeks ended December 24, 2000 was $715,000, compared
to a net loss of $39,169,000 for the comparable period in 2000. The 2000 net
loss included the above-mentioned asset write-down. As a percent of net sales,
net income (loss) increased from (32)% to 1%.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash and cash equivalents, securities
available for sale, cash flow from operations and additional financing capacity.
As of December 24, 2000, we had a $50,000,000 credit facility secured by our
accounts receivable and inventory. Letters of credit outstanding under this
facility totaled $17,085,000 as of such date, including $813,000 issued as
security for our $800,000 variable rate demand note, $15,647,000 issued in
connection with obligations under equipment leases, and $625,000 issued to
support potential self-insured workmens' compensation obligations. No other
letters of credit were outstanding under the credit facility at December 24,
2000. The amount we can borrow under this credit facility is limited by the
levels of our accounts receivable and inventory balances. As of December 24,
2000, $32,857,000 of borrowing capacity remained available to us.
Our cash and cash equivalents increased from $129,314,000 at September 24, 2000
to $146,826,000 at December 24, 2000. Our securities available for sale
decreased from $110,955,000 to $96,661,000 during the same period. Overall, this
reflects a $3,218,000 increase in our cash and cash equivalents and securities
available for sale. We generated cash from operating activities of $21,222,000
for the thirteen weeks ended December 24, 2000.
Cash used for capital expenditures totaled $9,698,000 for the thirteen weeks
ended December 24, 2000. We currently anticipate spending approximately
$50,000,000 during 2001 primarily for new business systems, program tooling and
manufacturing and process technology and equipment. Financing of these
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capital expenditures will be principally from internally generated funds, cash
and cash equivalents, securities available for sale and/or additional financing
capacity.
Certain of our existing financing agreements contain financial covenants and
covenants which may restrict our ability to enter into certain types of
financing. At the end of our 2000 third quarter, we were not in compliance with
certain restrictive financial covenants because of our operating results in 1999
and in the first three quarters of 2000. As a result, although we had obtained
waivers of these covenant violations for our third quarter, we classified the
long-term portion of our outstanding senior notes as current liabilities on our
third quarter balance sheet. We subsequently completed the negotiation and
execution of amendments to the applicable financing agreements, which waived or
modified the terms of these financial covenants for future fiscal periods. Other
than non-compliance with certain covenants in one equipment lease, which was
terminated as of September 29, 2000 by our purchase of the leased equipment,
effective September 24, 2000, we were in compliance with all such covenants. We
remained in compliance with all such covenants at December 24,2000. Our senior
notes were reclassified as a long-term liability in our financial statements for
the fourth quarter and for the year ended September 24, 2000. If we are not in
compliance with financial covenants in our financing agreements at the end of
any quarter, our future financial results and liquidity could be materially
adversely affected.
We currently believe that our cash and cash equivalents, securities available
for sale, cash generated from operations and credit facility will be sufficient
to meet our operating expenses, debt service requirements and capital
expenditures through 2001. We will pursue additional debt or equity financing to
supplement our current capital resources if needed beyond 2001. Our ability to
obtain additional financing will depend upon a number of factors, including our
future performance and financial results and general economic and capital market
conditions. We cannot be sure that we will be able to raise additional capital
on reasonable terms or at all.
MARKET TRENDS AND CERTAIN CONTINGENCIES
(A) MARKET TRENDS
We expect the expanding use of personal computers, enterprise computing and
storage, increasingly complex software and the emergence of new applications for
disk storage, such as Internet-related storage, digital video recording, digital
cameras, network attached storage, gaming consoles and other consumer
applications, will further increase disk drive demand in the future. We also
believe demand for disk drives will continue to be subject, as it has in the
past, to rapid or unforeseen changes resulting from, among other things, changes
in disk drive inventory levels, technological advances, responses to competitive
price changes and unpredicted high or low market acceptance of new drive models.
Improvements in data density of hard disk drives, extending from the desktop
market to server drives, has reduced unit shipments of suspension assemblies
since the third quarter of 1999. We currently expect suspension assembly
shipments will be lower in quarter two compared to quarter one of 2001 due to
temporary industry inventory adjustments.
As in past years, disk drives continue to be the storage device of choice for
applications requiring low access times and higher capacities because of their
speed and low cost per megabyte of stored data. The cost of storing data on disk
drives continues to decrease primarily due to increasing data density, the
amount of data which can be stored on magnetic disks.
Improvements in data density have been attained by lowering the fly height of
the read/write head, using smaller read/write heads with advanced air bearing
designs, improving other components such as motors and media, and using new
read/write head types such as those of magneto-resistive (MR) and giant
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magneto-resistive (GMR) design. The move to MR and GMR heads, which require more
electrical leads, and the transition to smaller pico-sized heads, which are more
sensitive to mechanical variation, have compelled drive manufacturers to use
wireless suspension technologies, such as our TSA suspension assemblies. Our TSA
suspension assemblies are being widely adopted within the disk drive industry.
The continual pursuit of increasing data density and lower storage costs are
leading to further value-added features for TSA suspensions, such as extended
electrical leads (tails) and switch shunts. A switch shunt helps our customers
prevent damage to the sensitive recording heads by reducing the risk of
electrostatic discharge. Additionally, actuated suspensions, including our aTSA
suspension, incorporate a second stage actuator on the suspension to improve
head positioning over increasingly tighter data tracks. Our cTSA suspension
allows for attachment of preamplifiers near the head to improve data transfer
signals.
The introduction of new types or sizes of read/write heads and new disk drive
designs tends to initially decrease customers' yields with the result that we
may experience temporary elevations of demand for some types of suspension
assemblies. Likewise, as programs mature, higher yields decrease the demand for
suspension assemblies. The advent of new heads and new drive designs may require
rapid development and implementation of new suspension types which temporarily
may reduce our manufacturing yields and efficiencies. There can be no assurance
that we will not continue to be affected by such changes.
We generally experience fluctuating selling prices due to competitive pricing
pressures, product maturity, and new product offerings. While many of our
current products are reaching or are in the mature phase of their life cycles
and thus are experiencing declining selling prices, our newer products initially
have higher selling prices.
(B) CONTINGENCIES
On September 18, 2000, we commenced a lawsuit in the United States District
Court for the District of Minnesota against the Magnecomp Group, an
unincorporated association of companies, and seven members of the Magnecomp
Group. The lawsuit alleges that the Magnecomp Group has sold infringing products
without a license, and alleges infringement of nine of our patents related to
the design and manufacture of suspension assemblies. The lawsuit requests
damages, including treble damages, attorneys' fees, costs, and an injunction
against the Magnecomp Group.
On October 12, 2000, Magnecomp Corporation commenced a lawsuit in the United
States District Court for the Central District of California against us. The
lawsuit alleges that we sold products infringing four patents, engaged in
anti-competitive conduct in violation of federal and state antitrust laws, and
violated California state law regarding contractual interference and unfair
competition. The lawsuit requests damages, including treble damages, attorneys'
fees, costs, punitive damages, and an injunction against us. On December 8,
2000, the California District Court issued an order granting our motion to
transfer the California action to the United States District Court for the
District of Minnesota.
We and certain users of our products have from time to time received, and may in
the future receive, communications from third parties asserting patents against
us or our customers which may relate to our manufacturing equipment or to our
products or to products that include our products as a component. We are
currently a party to the litigation described above. In addition, certain of our
customers have been sued on patents having claims closely related to products we
sell. If any third party makes a valid infringement claim and a license were not
available on terms acceptable to us, our operating results could be adversely
affected. We expect that, as the number of patents issued continues to increase,
and
15
as we grow, the volume of intellectual property claims could increase. We may
need to engage in litigation to enforce patents issued or licensed to us,
protect trade secrets or know-how owned by us or determine the enforceability,
scope and validity of the intellectual property rights of others. We could incur
substantial costs in such litigation or other similar legal actions, which could
have a material adverse effect on our results of operations.
We are a party to certain other claims arising in the ordinary course of
business. In our opinion, the outcome of such claims will not materially affect
our current or future financial position or results of operations.
(C) OTHER MATTERS
In early calendar 2000, the World Trade Organization ("WTO") ruled that the
United States Foreign Sales Corporation ("FSC") provision constituted an illegal
export subsidy, and specified that the United States withdraw the FSC provision
effective October 1, 2000. In response to the ruling, the United States
government recently enacted The Extraterritorial Income Exclusion ("EIE") Act of
2000. The United States believes this is a WTO-compatible solution. A ruling
from the WTO on the EIE is not expected to be issued until the spring or summer
of calendar 2001. We do not expect that the new legislation will change
materially the tax benefit that we earn.
FORWARD-LOOKING STATEMENTS
The statements under the headings "General" and "Market Trends and Certain
Contingencies" about demand for and shipments of disk drives and suspension
assemblies, including TSA suspensions, manufacturing capacity and yields and
selling prices, the statements under the heading "General" about workforce and
cost reduction efforts, and the statements under the heading "Liquidity and
Capital Resources" about capital expenditures and capital resources, are
forward-looking statements based on current expectations. These statements are
subject to risks and uncertainties, including slower or faster customer
acceptance of our new products, difficulties in producing our TSA suspensions,
difficulties in managing our capacity, changes in manufacturing efficiencies,
difficulties in achieving cost reduction goals and the other risks and
uncertainties discussed above. These factors may cause our actual future results
to differ materially from historical earnings and from the financial performance
we presently anticipate.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our credit facility with The CIT Group/Business Credit, Inc. carries interest
rate risk, in connection with certain borrowings under the working capital line
it provides, that is generally related to either LIBOR or the prime rate. If
either of these rates were to change while we had such borrowings outstanding
under the working capital line provided by the credit facility, interest expense
would increase or decrease accordingly. At December 24, 2000, there were $58,500
in outstanding borrowings under the working capital line provided by the credit
facility. Our variable rate demand note ("Note") also carries interest rate risk
that is generally related to the 91-day U.S. treasury bill interest rate. At
December 24, 2000, the outstanding principal amount of the Note was $800,000
which was subject to an interest rate of 4.75%.
We have no earnings or cash flow exposure due to market risk on our other debt
obligations which are subject to fixed interest rates. Interest rate changes,
however, would affect the fair market value of this fixed rate debt. At December
24, 2000, we had fixed rate debt of $207,811,000.
We do not enter into derivative or other financial instruments for trading or
speculative purposes. All of our sales transactions are denominated in U.S.
dollars and thus are not subject to risk due to currency exchange fluctuations.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
Unless otherwise indicated, all documents incorporated herein by reference to a
document filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, are located under SEC file number
0-14709.
3.1 Restated Articles of Incorporation of HTI, as amended by Articles of
Amendment dated 1/27/88 and as amended by Articles of Amendment dated
1/21/97 (incorporated by reference to Exhibit 3.1 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 6/29/97).
3.2 Restated By-Laws of HTI (incorporated by reference to Exhibit 3.2 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 12/29/96) and
Amendments to Restated By-Laws of HTI dated 7/19/00 (incorporated by
reference to Exhibit 3.2 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 6/25/00).
4.1 Instruments defining the rights of security holders, including an
indenture. The Registrant agrees to furnish the Securities and Exchange
Commission upon request copies of instruments with respect to long-term
debt.
4.2 Indenture dated as of 3/18/98 between HTI and U.S. Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.6 to
HTI's Registration Statement on Form S-3, Registration No. 333-50143).
4.3 Purchase Agreement dated 3/12/98 by and among HTI, NationsBanc
Montgomery Securities LLC and First Chicago Capital Markets, Inc.
(incorporated by reference to Exhibit 4.7 to HTI's Registration
Statement on Form S-3, Registration No. 333-50143).
4.4 Shelf Registration Agreement dated as of 3/18/98 by and among HTI,
NationsBanc Montgomery Securities LLC and First Chicago Capital Markets,
Inc. (incorporated by reference to Exhibit 4.8 to HTI's Registration
Statement on Form S-3, Registration No. 333-50143).
10.1 Office/Warehouse Lease between OPUS Corporation, Lessor, and HTI,
Lessee, dated 12/29/95 (incorporated by reference to Exhibit 10.2 to
HTI's Quarterly Report on Form 10-Q for the quarter ended 3/24/96), and
First Amendment to Office/Warehouse Lease dated 4/30/96 (incorporated by
reference to Exhibit 10.2 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 6/23/96).
#10.2 Directors' Retirement Plan effective as of 1/1/92 (incorporated by
reference to Exhibit 10.12 to HTI's Annual Report on Form 10-K for the
fiscal year ended 9/27/92) and Amendment effective as of 11/19/97
(incorporated by reference to Exhibit 10.5 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 12/28/97).
#10.3 Description of Bonus Program for Key Employees of Hutchinson Technology
Incorporated (incorporated by reference to Exhibit 10.13 to HTI's Annual
Report on Form 10-K for the fiscal year ended 9/27/92).
18
#10.4 1988 Stock Option Plan (incorporated by reference to Exhibit 10.8 to
HTI's Annual Report on Form 10-K for the fiscal year ended 9/25/88),
Amendment to the 1988 Stock Option Plan (incorporated by reference to
Exhibit 10.5 to HTI's Annual Report on Form 10-K for the fiscal year
ended 9/26/93), and Amendment to the 1988 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 3/26/95).
*10.5 Patent License Agreement, effective as of 9/1/94, between HTI and
International Business Machines Corporation (incorporated by reference
to Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q/A for the
quarter ended 6/25/95).
10.6 Lease Agreement between Meridian Eau Claire LLC and HTI, dated 5/1/96
(incorporated by reference to Exhibit 10.10 to HTI's Quarterly Report on
Form 10-Q for the quarter ended 6/23/96) and First Amendment to Lease
(incorporated by reference to Exhibit 10.6 to HTI's Annual Report on
Form 10-K for the fiscal year ended 9/24/00).
10.7 Master Lease Agreement dated as of 12/19/96 between General Electric
Capital Corporation, as Lessor ("GE"), and HTI, as Lessee (incorporated
by reference to Exhibit 10.11 to HTI's Quarterly Report on Form 10-Q for
the quarter ended 12/29/96), Amendment dated 6/30/97 to the Master Lease
Agreement between GE and HTI (incorporated by reference to Exhibit 10.11
to HTI's Quarterly Report on Form 10-Q for the quarter ended 12/28/97),
letter amendment dated 3/5/98 to the Master Lease Agreement between GE
and HTI (incorporated by reference to Exhibit 10.11 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 3/29/98), letter amendment
dated 9/25/98 to the Master Lease Agreement between GE and HTI
(incorporated by reference to Exhibit 10.11 to HTI's Annual Report on
Form 10-K for the fiscal year ended 9/27/98), letter amendment dated
1/11/00, effective as of 12/22/99, to the Master Lease Agreement between
GE and HTI (incorporated by reference to Exhibit 10.1 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/26/99), and letter
amendment dated 8/31/00 to the Master Lease Agreement between GE and HTI
(incorporated by reference to Exhibit 10.7 to HTI's Annual Report on
Form 10-K for the fiscal year ended 9/24/00).
#10.8 Hutchinson Technology Incorporated 1996 Incentive Plan (incorporated by
reference to Exhibit 10.12 to HTI's Quarterly Report on Form 10-Q for
the quarter ended 12/29/96).
#10.9 Hutchinson Technology Incorporated Incentive Bonus Plan (incorporated by
reference to Exhibit 10.13 to HTI's Quarterly Report on Form 10-Q for
the quarter ended 12/28/97).
#10.10 Description of Fiscal Year 2001 Management Bonus Plan of Hutchinson
Technology Incorporated.
* Exhibit 10.5 contains portions for which confidential treatment has been
granted by the Securities and Exchange Commission.
# Management contract, compensatory plan or arrangement required to be filed as
an exhibit to this Quarterly Report on Form 10-Q.
(B) REPORTS ON FORM 8-K:
We filed a Current Report on Form 8-K dated September 29, 2000 reporting, under
Item 5 ("Other Events") of Form 8-K, the completion of our negotiation and
execution of amendments to certain of our financing agreements.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUTCHINSON TECHNOLOGY INCORPORATED
Date: February 5, 2001 By /s/ Wayne M. Fortun
------------------------------ ----------------------------------
Wayne M. Fortun
President and Chief Executive
Officer
Date: February 5, 2001 By /s/ John A. Ingleman
----------------------------- ----------------------------------
John A. Ingleman
Vice President, Chief Financial
Officer and Secretary
20
INDEX TO EXHIBITS
Exhibit
No. Description Page
------ ----------- ----
3.1 Restated Articles of Incorporation of HTI, as amended by
Articles of Amendment dated 1/27/88 and as amended by Articles
of Amendment dated 1/21/97 (incorporated by reference to
Exhibit 3.1 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 6/29/97)..............................................Incorporated by Reference
3.2 Restated By-Laws of HTI (incorporated by reference to Exhibit
3.2 to HTI's Quarterly Report on Form 10-Q for the quarter ended
12/29/96) and Amendments to Restated By-Laws of HTI dated
7/19/00 (incorporated by reference to Exhibit 3.2 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 6/25/00)........Incorporated by Reference
4.1 Instruments defining the rights of security holders, including
an indenture. The Registrant agrees to furnish the Securities and
Exchange Commission upon request copies of instruments with
respect to long-term debt.
4.2 Indenture dated as of 3/18/98 between HTI and U.S. Bank National
Association, as Trustee (incorporated by reference to Exhibit
4.6 to HTI's Registration Statement on Form S-3, Registration
No. 333-50143)......................................................Incorporated by Reference
4.3 Purchase Agreement dated 3/12/98 by and among HTI, NationsBanc
Montgomery Securities LLC and First Chicago Capital Markets,
Inc. (incorporated by reference to Exhibit 4.7 to HTI's
Registration Statement on Form S-3, Registration No. 333-50143).....Incorporated by Reference
4.4 Shelf Registration Agreement dated as of 3/18/98 by and among
HTI, NationsBanc Montgomery Securities LLC and First Chicago
Capital Markets, Inc. (incorporated by reference to Exhibit 4.8
to HTI's Registration Statement on Form S-3, Registration No.
333-50143)..........................................................Incorporated by Reference
10.1 Office/Warehouse Lease between OPUS Corporation, Lessor, and
HTI, Lessee, dated 12/29/95 (incorporated by reference to
Exhibit 10.2 to HTI's Quarterly Report on Form 10-Q for the
quarter ended 3/24/96), and First Amendment to Office/Warehouse
Lease dated 4/30/96 (incorporated by reference to Exhibit 10.2
to HTI's Quarterly Report on Form 10-Q for the quarter ended
6/23/96)............................................................Incorporated by Reference
21
Exhibit
No. Description Page
------ ----------- ----
10.2 Directors' Retirement Plan effective as of 1/1/92 (incorporated
by reference to Exhibit 10.12 to HTI's Annual Report on Form
10-K for the fiscal year ended 9/27/92) and Amendment effective
as of 11/19/97 (incorporated by reference to Exhibit 10.5 to
HTI's Quarterly Report on Form 10-Q for the quarter ended
12/28/97)...........................................................Incorporated by Reference
10.3 Description of Bonus Program for Key Employees of Hutchinson
Technology Incorporated (incorporated by reference to Exhibit
10.13 to HTI's Annual Report on Form 10-K for the fiscal year
ended 9/27/92)......................................................Incorporated by Reference
10.4 1988 Stock Option Plan (incorporated by reference to Exhibit
10.8 to HTI's Annual Report on Form 10-K for the fiscal year
ended 9/25/88), Amendment to the 1988 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to HTI's Annual
Report on Form 10-K for the fiscal year ended 9/26/93), and
Amendment to the 1988 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to HTI's Quarterly Report on Form 10-Q
for the quarter ended 3/26/95)......................................Incorporated by Reference
10.5 Patent License Agreement, effective as of 9/1/94, between HTI
and International Business Machines Corporation (incorporated by
reference to Exhibit 10.11 to HTI's Quarterly Report on Form
10-Q/A for the quarter ended 6/25/95)...............................Incorporated by Reference
10.6 Lease Agreement between Meridian Eau Claire LLC and HTI, dated
5/1/96 (incorporated by reference to Exhibit 10.10 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 6/23/96) and
First Amendment to Lease (incorporated by reference to Exhibit
10.6 to HTI's Annual Report on Form 10-K for the fiscal year
ended 9/24/00)......................................................Incorporated by Reference
22
Exhibit
No. Description Page
------ ----------- ----
10.7 Master Lease Agreement dated as of 12/19/96 between General
Electric Capital Corporation, as Lessor ("GE"), and HTI, as
Lessee (incorporated by reference to Exhibit 10.11 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 12/29/96),
Amendment dated 6/30/97 to the Master Lease Agreement between GE
and HTI (incorporated by reference to Exhibit 10.11 to HTI's
Quarterly Report on Form 10-Q for the quarter ended 12/28/97),
letter amendment dated 3/5/98 to the Master Lease Agreement
between GE and HTI (incorporated by reference to Exhibit 10.11
to HTI's Quarterly Report on Form 10-Q for the quarter ended
3/29/98), letter amendment dated 9/25/98 to the Master Lease
Agreement between GE and HTI (incorporated by reference to
Exhibit 10.11 to HTI's Annual Report on Form 10-K for the fiscal
year ended 9/27/98), letter amendment dated 1/11/00, effective
as of 12/22/99, to the Master Lease Agreement between GE and HTI
(incorporated by reference to Exhibit 10.1 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/26/99), and letter
amendment dated 8/31/00 to the Master Lease Agreement between GE
and HTI (incorporated by reference to Exhibit 10.7 to HTI's
Annual Report on Form 10-K for the fiscal year ended 9/24/00).......Incorporated by Reference
10.8 Hutchinson Technology Incorporated 1996 Incentive Plan
(incorporated by reference to Exhibit 10.12 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/29/96).................Incorporated by Reference
10.9 Hutchinson Technology Incorporated Incentive Bonus Plan
(incorporated by reference to Exhibit 10.13 to HTI's Quarterly
Report on Form 10-Q for the quarter ended 12/28/97).................Incorporated by Reference
10.10 Description of Fiscal Year 2001 Management Bonus Plan of
Hutchinson Technology Incorporated..................................Filed Electronically